Ability to pay is evaluated independently of college
costs. Only after the family contribution is calculated is it
subtracted from the cost of education to arrive at financial need.

General Principles of Professional Judgment

The focus of a professional judgment adjustment should be on
how the special circumstances affects the family's ability to pay.

Any inconsistencies, inaccuracies or conflicting information
must be resolved before any professional judgment adjustments can be made.

Professional judgment decisions should be based on a review of the
family's complete financial situation and not just the specific
circumstances that lead them to request a review. Sometimes there are
offsetting changes in the family's financial situation.

The expected family contribution or cost of attendance that
results from a professional judgment adjustment
must be used for all Federal student aid funds awarded to the
student, including Pell, Perkins, Stafford, PLUS, and campus-based
programs.

Subjectivity of Professional Judgment

Professional judgment is applied on a case-by-case basis
after individual review of the student's situation. It is a subjective
process.
There is no requirement than the financial aid administrator reach the
same decision in similar cases, so long as there is no discrimination.
A financial aid administrator may be completely arbitrary in reaching
a decision to deny an adjustment. For example, it is acceptable for a
financial aid administrator to deny an adjustment because he or she
feels the parent was impolite or too aggressive, or because he or she
believes that the family is being dishonest or attempting to game the
system. However, to the extent that similar special
circumstances would normally lead to a similar conclusion, an ethical
approach would dictate reaching a similar decision, all else being equal.
Financial aid administrators should strive for consistency in their
professional judgment decisions.

Data element adjustments are permitted for conditions that
distinguish a student from among a class of students, as opposed to
conditions that exist across a class of students. The conditions do
not necessarily need to be rare, merely special
circumstances. In contrast, the conditions for a dependency
override are required to be unusual circumstances (i.e., rare
or uncommon).

Decisions made by one school (e.g., a dependency override) are not
binding on financial aid administrators at another school.

Professional judgment decisions must be revisited each year, to
verify that the special circumstances that lead to the decision are
still in effect.

Professional judgment is optional and not mandatory.
There is no requirement that the financial aid administrator
make any professional judgment adjustments. Schools are permitted to
make adjustments when there are special circumstances, but not
required to do so.

Professional judgment is more art than science. It combines
common sense with compassion and economics with ethics.

Trial Runs

Financial aid administrators might want to check whether the
special circumstance will affect the
student's EFC before going to the effort to consider a professional
judgment adjustment. For example, if the family qualifies for the
simplified needs test, assets are disregarded, so it is pointless to
consider a professional judgment review of the treatment of an
asset. Likewise, if the student qualifies for automatic zero EFC,
adjustments to income usually have no effect. For automatic zero EFC
cases, however, the financial aid administrator may want to consider
increasing the cost of attendance.

Some financial aid administrators will do a trial run before
making an adjustment to see if there's an impact on the EFC. If the
adjustment does not result in a significant change in EFC (i.e., more
than $400), they do not allow the adjustment. Some financial aid
administrators will make the adjustment regardless of the impact on
EFC, simply to satisfy irate parents. Others will only make
adjustments for significant changes in EFC, in order to discourage
nitpicking by parents.

Limitations of Professional Judgment

Financial aid administrators are not allowed to use
professional judgment to circumvent the intent of the law or
regulations or to change the formula or tables used in the Federal need
analysis methodology or to change the EFC directly. Only the inputs to
the formula may be changed, and then only to the extent dictated by
the special circumstances. Adjustments are not permitted to correct a
real or perceived problem in the tables or methodology, such as a lack
of regional adjustments in the Income Protection Allowance, a lack of
fairness in the state tax allowances (e.g., a failure of the state tax
allowances to consider differences in local income taxes), or an error
in the asset protection allowance tables.

Moreover, when a specific situtation is not addressed by the letter of
the law or the regulations, financial aid administrators should
avoiding rendering professional judgment decisions that are
inconsistent with the spirit of existing law, regulations and guidance.

Professional judgment may not be used to change eligibility
requirements or selection criteria. For example, financial aid
administrators may not change a student's enrollment status to
full time if the student is enrolled less than full time.

Professional judgment may not discriminate on the basis of
race, religion, sex, national origin, age, color, creed, or
disability status. This is based on prohibitions against the
discrimination on the basis of race, religion, sex, national origin,
or age in the awarding of federal funds (Section 111(a) of the Higher
Education Act of 1965; Title IX, Section 1681 of the Education
Amendments of 1972; Age Discrimination Act of 1975) or on the basis of
race, color, national origin, religion, creed, sex, marital status,
age or disability status in the awarding of education loans (Sections
421(a), 439(e) and 479A(c) of the Higher Education Act). The
regulations relating to loan certification also prohibit
discrimination on the basis of income or the selection of a
particular lender or guaranty agency (34 CFR 682.603(e)).
Note that it
is permitted to make adjustments for disability-related expenses, as
that is specifically allowed by the statute.

Although the regulations cannot preclude a financial aid
administrator from exercising professional judgment to make
adjustments to data elements relating to need analysis, financial aid
administrators should tread lightly when an adjustment would violate
an existing regulation or published guidance from the US Department of
Education. Professional judgment operates under a "reasonable person
principle", and it is unlikely that a decision which contradicts
current law would be considered reasonable. Only when there is a clear
oversight in the regulations, such as a special circumstance not
foreseen when the regulations were drafted, can a financial aid
administrator consider acting in opposition to existing
regulations. In such circumstances it is best to seek the advice of
colleagues to make sure that there is widespread agreement that the
proposed decision is reasonable. Note also that professional judgment
decisions cannot represent a change to the need analysis formula.

A good example might be when the student's marital status changes
because the student's spouse has entered into a persistent vegetative
state. A financial aid administrator could make a case for updating
the student's marital status in such a situation despite the
regulations in 34 CFR 668.55(a)(3) because the spouse's health
situation is a special circumstance orthogonal to the realm of the
specific regulations.

Since student aid is not normally available to pay prior year
charges, it is generally not acceptable to make adjustments based on
unusual circumstances that relate to a prior award year. The
circumstances must either affect the prior tax year (upon which the
EFC is based) or the current award year.

Some schools will allow adjustments for such expenses, however, when
the adjustment is restricted to increasing eligibility for private
student loans. Some private student loans can be used to pay for a
prior year's charges. Some schools will also allow adjustments when
there were extenuating circumstances that prevented the student from
submitting a request for PJ during the affected award year.

If a special circumstance spans both the prior tax year and the
current award year, it is usually not acceptable to make an adjustment
for the expenses from both years. The purpose of need analysis is to
estimate the ability to pay during the award year. Including expenses
from more than one year is contrary to that goal. One must use one
year, or the other, or an average of the two years, but not both.

If one has a choice of years, one should generally prefer the expenses
from the award year as those are more likely to reflect the family's
ongoing financial situation. However, if the expenses are likely to be
volatile from one year to the next, it is often better to use an
average of the two years (or even the past three, four or five years)
to smooth out the volatility.

If the expenses from the two years span a contiguous 12-month period
ending on about the date of the special circumstances review, and are
likely to continue during the rest of the award year, it is ok to use
the expenses from both years, to the extent that they are limited to
the 12-month span. For example, if a dependent student's parent
suffered a serious illness starting in July of the prior tax year and
is unable to work, it is ok to adjust based on the July-June period,
even though it spans two years.

Ultimately, the financial aid administrator needs to focus on
selecting a set of expenses that are predictive of the family's
ability to pay during the award year. So long as one can make a
reasonable argument that the overall result represents a good estimate
of the family's income and assets during the award year, it does not
matter as much whether the adjustments are based on one year or the
other.

Principles Concerning Expenses

Is the expense discretionary in nature, or was it involuntary?

The non-discretionary principle is not a hard and fast rule. It is
neither necessary nor sufficient that the expenses be
non-discretionary in nature. For example, unusual capital gains and
job loss can be discretionary in nature and still merit an adjustment,
because they don't reflect the family's ability to pay. Likewise, mandatory
bankruptcy payments ordered by a court are non-discretionary in
nature, but might not merit an adjustment if they derive from debt
that would not have been considered by the Federal need analysis
methodology prior to bankruptcy, such as consumer credit card
debt. Nevertheless, the discretionary nature of an expense is still a
good rule of thumb for distinguishing expenses that might or might not
merit professional judgment. Necessities are much more likely to merit
an adjustment than lifestyle choices.

Is the expense already considered by the need analysis formula
(i.e., as a component of the income protection allowance), and to what degree?
For example, 11% of the income protection allowance is for medical
expenses, and should be subtracted from medical and dental expenses
before making an adjustment. Financial aid administrators should take
care to prevent double-dipping.

Adjustments may not be made for expenses that occur after the
student has graduated, such as professional licensing exam fees or
other post-enrollment expenses.

Principles Concerning Income

Is the income representative of the family's typical annual
income, or is it a one-time event that is not reflective of their
ability to pay? Unusual capital gains from sale of securities and real
estate, insurance proceeds, worker's compensation buyouts, employer
reimbursements for moving expenses, signing bonuses, personal injury
settlement and even lottery winnings are all examples of one-time
events.

Financial aid administrators often refer to such one-time events as
double counting, since the money counts as both income and
asset, even though the money will only be present as an asset during
the award year.

Income earned during the prior tax year that is subsequently invested
by the family is not considered double-counted, even though it is
present as both income and asset, because the prior tax
year income is used as an estimate of award year income. The award
year income is not really counted as an asset because it is a proxy
for future income,
and the assets are reported as of the application date. To the extent
that a one-time event will not be repeated during the award year,
financial aid administrators may use professional judgment to exclude
the event from income.

The typical treatment of such one-time events is to make an adjustment to
income while still counting the money as an asset. The usual income
adjustment for capital gains is to replace it with the average of the
last three years worth of capital gains, although some financial aid
administrators will eliminate it entirely from income. (The reasoning
for replacing unusually high capital gains with an average
is that capital gains usually represents real income, so it shouldn't
be disregarded entirely. Using an average smoothes out the volatility,
replacing an unusual amount with an amount that is more likely to
reflect performance during the award year. The argument for excluding
it entirely is that parents often liquidate investments to pay tuition
bills, and so are being penalized for using their savings for
educational expenses.) The usual
income adjustment for an inheritance
is to eliminate it from income. (Inheritances usually show up as
untaxed income on Worksheet B, since usually the estate and not the
beneficiary pays the taxes. Most wills include clauses requiring the
estate to pay all taxes. The main exceptions are for income earned by
the estate after the date of death, inherited pensions and IRAs,
and capital gains from selling property that was inherited.)
The usual income adjustment for a worker's compensation buyout is to
exclude of it from income. Some financial aid administrators would
include the portion that would have be paid this year had there been
no buyout.

The usual income adjustment for a personal injury settlement or
court-awarded damages is to exclude it from income. Some financial aid
administrators will also reduce the amount counted as an asset by any
amounts intended to pay for future medical expenses.

Insurance settlements for fire or theft do not count as income, as
they represent compensation for loss. If the family indicates an
intention to use the settlement to replace the property (i.e., rebuild
a home destroyed by fire), the financial aid administrator may want to
exclude the settlement as an asset, since the settlement represents only a
temporary increase in the family assets that are considered by need analysis.

In most situations where the financial aid administrator makes an
income adjustment for double-counting, there is no adjustment to
assets (i.e., the money still counts as an
asset).

Although someone with a windfall is better able to pay for
college than someone without a windfall, limiting the impact of the
windfall to assets adequately assesses the difference in ability to pay.
Counting a windfall as an asset but not as income will not make the
family unfairly Pell eligible. If a family receives a $100,000 life
insurance settlement, treating it as an asset will add $5,640 to their EFC,
eliminating Pell eligibility. (A financially savvy family, however,
might invest it in an annuity or use it to buy a home or prepay a
mortgage, preventing it from counting as an asset as well.)

Professional judgment decisions can increase income figures in
addition to decreasing them. For example, when an independent student
receives financial support from a parent, professional judgment may be
used to include that income as untaxed income on the worksheets.

If an adjustment is made to shift income from prior tax year
income to award year income, similar adjustments should be made to
other income and expense figures. For example, if a child support
agreement terminated during the prior tax year, and the financial aid
administrator is allowing an adjustment to income from prior tax year
to award year for some other reason (say, anticipated layoff), the
financial aid administrator should also adjust the Worksheet C amount
for child support paid to reflect the anticipated child support
payments during the award year.

When using estimated income instead of base year income, it is
better to use an estimate of award year income than an estimate of
income in the current calendar year or some other twelve month period
(say, starting at the date of the change in income). The focus of
need analysis is to identify the family's ability to pay during the
award year.

When the wage-earner's occupation has variable income, it is
acceptable to use an average of their income during the past three
years when making an adjustment for unusually high income during the
prior tax year. Examples include real estate brokers, waitresses, attorneys,
salespeople, taxi drivers, overtime variability, self-employment, and other
occupations where income is based largely on tips and commissions. A
longer horizon (say, five or seven years) can be used when the annual income is
extremely volatile.

Principles Concerning Taxes

When an adjustment is made that reduces income, one usually
does not make a corresponding adjustment to taxes paid, as the taxes paid
represents a real expense to the family, regardless of any change in
the financial aid treatment of the income. Reducing taxes paid would
increase the EFC since it increases the available income figure. Only
when an adjustment to income reflects an anticipated reduction in
taxable income during the award year should a corresponding adjustment
be made to taxes paid.

However, it is very difficult to decide how much to reduce taxes
paid. The existence of Alternative Minimum Tax (AMT), for example, can
complicate the process of identifying how a change in income or
deductions will affect taxes paid. Financial aid administrators are
not required to be tax accountants. Adjusting taxes paid is a
fine-tuning adjustment that often results in a very small change in
EFC as compared with the overall adjustment that lead to a change in
predicted taxable income.

When tax tables reflect a lower amount of tax than what the
family actually paid, use the family's actual tax liability. Since the
amount of taxes paid represents an allowance against income, a higher
amount of taxes paid will make the family eligible for more student aid.

In some cases using the tax tables to project the family's tax
liability will be significantly inaccurate. For example, US citizens
who live and work abroad often have a significantly lower tax
liability due to the foreign income exclusion (IRS Form 2555).

The taxes paid figure on the FAFSA is prone to error. Common
errors include reporting the total withheld or the total due, as
opposed to the tax liability. Sometimes families incorrectly include
self-employment taxes (i.e., the employer's share of FICA taxes) in
the total. When conducting a professional judgment review, the
financial aid administrator should compare the FAFSA figure with the
income tax returns to verify its accuracy.

Self-employed parents often argue that the FICA taxes should be
included in the taxes paid figure. However, the employer's half of
FICA is allowed as an adjustment to income for self-employed
individuals, and so is already accounted for in AGI. It is therefore
inappropriate to include FICA taxes in the taxes paid figure, since
doing so would be redundant, counting them twice.

Schedule A of the income tax return reduces taxes but not
adjusted gross income (AGI), so adjustments for items that are
itemized on Schedule A may be justified, as they are not already
excluded from AGI.

Documentation Requirements

A decision concerning a special circumstance should be backed up
with written documentation relating to the specific student's special
circumstances. The decision should identify the specific special
circumstances upon which the decision was based.

The documentation should not only support the existence of the
special circumstance, but should also support the amount of the
adjustment.

The documentation must relate to the special circumstances that
are connected to the data element adjustment or dependency
override. In other words, both the documentation and the amount and
nature of the adjustment must relate to the same special
circumstances. Financial aid administrators cannot use one special
circumstance to justify an adjustment in an unrelated data element,
and financial aid administrators cannot use a special circumstance to
justify an adjustment without backing up that special circumstance
with documentation.

Documentation should be in writing.

Documentation should be verifiable.

Documentation can include statements from a neutral third
party, such as a teacher, guidance counselor, social worker,
physician, court-appointed child advocates, member of the clergy,
operator of a women's or family shelter, and other adults (e.g., the
parents of the friend with whom the student is staying). Documentation
can also include copies of tax returns, bank and brokerage statements,
pay stubs, letters from employers, court documents and police reports.

When documentation from a neutral third party is not
available, a signed statement from the family describing the special
circumstances is acceptable.

Documentation should be sufficient to convince a "reasonable
person" that the professional judgment decision was appropriate, based
on sound reasoning, and not extreme.